Data breaches are on the rise. So are the number of
breach-related class actions.

At plaintiffs' class action firms, the basic facts are
assumed, the complaints are drafted, and the claims are ready to
file before a breach ever happens. When a breach occurs, the
lawyers race to file first. But what happens then?

Until recently, the answer was the plaintiffs lost more often
than not. Why? Courts found that someone who was not harmed by the
breach did not have "standing" to sue because he was not
personally affected by the challenged conduct.

Many observers were starting to think that the threat of
litigation surrounding breaches wasn't as bad as everyone
thought. The Seventh Circuit Court of Appeals, in Chicago, may have
changed that perception with its July 20, 2015 decision in
Remijas et al. v. Neiman Marcus Group, LLC1.

Neiman Marcus suffered an ongoing breach over the second half of
2013; 350,000 credit card records were stolen. The company
discovered the breach in December but said nothing to affected
consumers until January. Almost 10,000 of the hacked accounts had
fraudulent charges. Other cardholders claimed that they purchased
credit monitoring, so they could track their accounts going
forward. The rest were unaffected, or at least were not aware of
any actual harm. The trial court threw out the case. The Seventh
Circuit reversed, establishing a more forgiving standard for
standing than other courts have applied in other similar cases.

Rejecting the argument that credit card issuers typically cover
fraudulent charges, so consumers were not harmed, the court found
that customers whose cards showed fraudulent charges had a tangible
injury and thus standing to sue. The court also concluded that
purchasing credit monitoring was sufficient to show a real injury,
reasoning that by offering victims a year of free credit
monitoring, Neiman's proved the point that the threat of
fraudulent charges was real (why else would Neiman's do it?).
Finally, the court noted plaintiffs' claims that Neiman's
deliberately delayed disclosing the breach until after the holiday
shopping season, allowing hackers to use the stolen data before
cardholders even knew they were at risk. The court also echoed the
old "Needless Markup" moniker by remarking that
Neiman's should have put more of the money it earned selling
overpriced merchandise into its data security and less into its
corporate pockets.

The court distinguished data breach cases from recent cases in
which courts found that plaintiffs lacked standing to sue.

First, the Seventh Circuit distinguished a Fair Credit Reporting
Act case now before the Supreme Court involving the people-finder
site Spokeo. In that case, the plaintiff alleged FCRA violations
because Spokeo inaccurately described him as better educated and
wealthier than he actually was, and said he was married when in
fact he was single. The FCRA includes provisions calling for
penalties, apart from actual damages, when a firm knowingly
violates its guidelines. The Spokeo plaintiff filed a classic
gotcha case: the information was wrong, but he suffered no harm
(unless, perhaps, calling him married is cramping his lifestyle).
Most expect the Supreme Court to say that a technical statutory
violation with no attendant harm is not sufficient to create
Article III standing. The Seventh Circuit preempts later arguments
that Spokeo overrules the Neiman's decision by saying that the
Neiman's case involves far broader and more concrete
allegations of harm than those alleged in Spokeo.

Second, the court discussed the Supreme Court's decision in
a case filed by political activists challenging the post-9/11
warrantless wiretap program. The Supreme Court said that without
proof the plaintiffs actually had been tapped they did not have the
right to sue—even though the reason they could not show they
had been tapped is because the government refused to tell them. The
Neiman's case is different, the court concludes, because many
of these plaintiffs know that they have been harmed.

So what does this mean? Plaintiffs are happy; companies are not.
The court sets a clear, straightforward standard that makes it
easier for plaintiffs to survive an initial motion to dismiss, and
is likely to be highly influential nationwide. The predominance of
data breach class actions are filed in Chicago and in the federal
courts in San Francisco and Silicon Valley, and decisions stating
clear rules in this area are likely to be followed in other
circuits.

The opinion does not decide whether cases filed as class actions
will actually proceed as such, because companies still can argue
that whether any particular person suffered harm requires a review
of individual facts. That argument typically leads courts to say
that plaintiffs cannot proceed as a class. Often, though, the big
win for plaintiffs in these cases is surviving a motion to dismiss,
allowing them to take broad discovery that can lead to embarrassing
facts about the lack of data protection, absent or inadequate
breach response planning, and, if it proves true, that the company
deliberately delayed notifying consumers out of fear about the
holiday shopping impact, the kind of reputational harm that
companies can't fix.

Footnote

1. Case 14-3122 (7th Cir. 2015)

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